NEW YORK ( ETF Expert) --Japanese stocks have been perennial underachievers.
When I suggested on Dec. 20 that investors might benefit from WisdomTree Japan Hedged Equity (DXJ), I was asking certain readers to challenge conventional wisdom. (See "A Foreign Stock ETF For A Rapidly Declining Currency.")
My thought process on the matter was relatively straightforward. The incoming prime minister of Japan expressed a determination to devalue the yen through unconventional bond-buying measures. At the time, it appeared that those measures might even rival the U.S. Federal Reserve's electronic moneyprinting.
It followed that if investors benefited by signing on for the Fed-fueled stock rally, wouldn't they be rewarded by dancing to the Bank of Japan's tune as well? Indeed, as long as one had a means to hedge against the yen's decline in value, one might profit handsomely in Japanese stocks due to the enormous increase in money supply.Since Dec. 20, Wisdom Tree Japan Hedged Japan Equity has rocketed 13.1%. As crazy as it sounds to "strong" currency advocates, the weakening of the yen may have bolstered confidence in Japanese companies and the Japanese economy. Keep in mind, I did not predict the CurrencyShares Japanese Yen Trust (FXY) would lose -9.4% in six-and-a-half weeks. I made a simple observation that the 50-day trendline of the exchange-traded fund had crossed below the 200-day trendline. With the yen likely to fall further in value, I surmised that Japan Hedged Equity had a reasonable risk-reward relationship. Similarly, I did not anticipate double-digit percentage price appreciation in less than two months. That's just something that happened. While the mainstream financial media may choose to trumpet the names of gurus who "called" Apple's (AAPL) demise or Japan's rise, the reality is that nobody has any way of knowing with certainty. Not me, not any individual. Right now, in fact, I would sooner wait for an 8%-10% pullback in DXJ than invest new money on a fund that has gone "vertical." If you are invested, consider a stop-limit loss order and/or a stop-gain to lock in profits. While I acknowledge the Japanese yen is likely to recover some of its ground, I believe that its long-term downtrend will remain intact in the foreseeable future. What's more, I believe we are beginning to see a return of the "yen carry trade," where global investors borrow the Japanese yen at negligible interest rates to invest in the higher-yielding Australian and New Zealand dollars. Enter PowerShares DB G10 Currency Harvest Fund (DBV). This exchange-traded tracker takes long futures positions in currencies associated with relatively high yielding rates and takes short futures positions in currencies associated with relatively low yielding rates. At present, DBV is effectively selling short the yen, the euro and the Swiss franc while simultaneously going long on the Australian dollar, the New Zealand dollar and the Norwegian krone. If last week's European flare-up is any guide, the euro is unlikely to appreciate any further in value. Moreover, a low-volatility currency investment that captures yen-euro weakness as well as Australia-New Zealand dollar strength may appeal to those who worry about additional stock exposure after a five-week winning streak. Over the last eight months, DBV has had solid support at its 50-day moving average. I would recommend waiting for a pullback to the 50-day. Follow @ETFexpert This article was written by an independent contributor, separate from TheStreet's regular news coverage.